Formerly a biochemistry educator and environmental remediation and consulting program manager for six different insurance groups, Dennis Konieczny is currently program development manager and head underwriter at BISA.

Insurance Policies: Coverage and the Contractor

Dennis Konieczny

Almost every week I am asked by a fire and water restoration contractor if I could find them lower cost
coverage than what they are currently paying. I routinely ask them to see their
current policies so I can make approximate comparisons. Usually they say they
just want to know what it would cost for a $1-million-per-occurrence policy with
a $2-million aggregate, including general liability and contractor’s
pollution liability with mold coverage.

I compare this to someone calling the contractor’s office and asking them to quote a price on restoring a
fire-damaged, 5,000-square-foot structure. Clearly, they could not provide a quote without knowing all the details of the use, quality of
construction desired, special features, and so forth.

The details are equally important
when purchasing an insurance policy. Insurance policies must be carefully
designed to fit the needs of the individual contractor. Contractors should not
replace their coverage based solely on price. Expert agents familiar with the
contractor’s needs should be asked to review the current policy and find
alternatives based on coverage issues as well as price. The contractor should expect the agent to
point out the strengths (or deficiencies) in both current and proposed policies so
that an appropriate decision can be made.

After reviewing hundreds
of fire and water contractors’ insurance policies, some re-occurring problem
areas should be brought to light. For Example, there is the policy that did
not cover bodily injury or property damage caused by bacteria. Each coverage part
of the policy had an exclusion for microbiologicals, including bacteria. The
policy has since reinstated limited coverage for fungi (mold) by special
endorsement, but did not bring back coverage for bacteria, even when the
contractor’s operations included remediation of flood and sewage-damaged properties.

Then there were those endorsements that
limited coverage to specified operations. Many times subcontracted
work was denied coverage under these endorsements. Many contractors whose
policies were reviewed admitted to operations other than those specified and
covered under their policies. Most of these policies would provide no coverage
for operations such as asbestos abatement and lead abatement, even when
subcontracted to qualified subcontractors. Operations shown on the application
must also be shown on the quotation and the covered-operations
endorsement, so that coverage cannot be denied for these claims.

There are also exclusions
for professional advice; plans; specifications; testing and errors or
omissions. Almost half of all claims against restoration contractors have included
some element of the contractor having not found all of the material for
remediation or all of the moisture to be dried, or having given poor advice leading
to damage. Most of the policies reviewed had either complete exclusions
for damage resulting from this type of alleged mistake, or very minor and limited
givebacks of coverage.

Most policies reviewed had
some form of exclusion for fines, penalties, multiplied or exemplary
damages. In a somewhat regulated industry, this could lead to great financial
problems for a contractor against whom a jury finds for such damages.

Some policies reviewed had
onerous “cross suits exclusions.” They would read something like, “any claim
made by any insured against any other insured under this policy.” These were so
broad as to eliminate coverage for claims made by an additional insured against
an insured contractor. Since owners often ask to be an additional insured,
this type of exclusion could eliminate coverage for any claim the owner
would make against an insured contractor. This type of exclusion should be
eliminated or narrowed to not apply additional insured claims against the insured.

Of grave concern, but of
such complexity that it would require a large dissertation of its own, are
contractual liability limitations. These are done by either “employee
third party action-over” exclusions, or contractual liability definition
limitations. Any reduction of coverage from what a standard “ISO” policy contains is
highly undesirable.>

Another common item
frequently found that needs to be considered carefully is a “Contractor or
Subcontractor Condition of Coverage” endorsement. These endorsements typically allow
the insurance company to deny a claim resulting from a subcontractor’s work
unless a series of conditions are fully met. While these conditions may be
desirable as good business practices, to totally deny coverage through a
“slip-up” may be a little draconian. Recommendations, rather than ironclad conditions,
would be highly desirable

When asked what was the
most pressing reason for purchasing their coverage, most contractors mention
mold. Nevertheless, most policies reviewed had limited mold coverage.
Coverage was limited to the contractors “spreading, discharging, or releasing” mold
to where it would do harm. Clearly, mold does not need to be released, or
alleged to have been released, to lead to a claim. Should a contractor
insufficiently dry a structure, mold (and bacteria) could begin to grow and cause damage
or injury due to spores entering from the outside or already present in the
building materials. A policy that requires an allegation of spreading or
discharge of the mold may well lead to a claim denial with the insured defending
themselves.

What should a contractor do? First
of all, read your current policies and look for the deficiencies
described in this article. Then, ask your agent if your past or proposed policies
have any of these deficiencies. If he or she cannot show you convincingly that
they do not, ask them to get it in writing from the incumbent insurance company
underwriter or the proposed company’s underwriter. The least they can do is to clarify the coverage they are
offering or excluding. If you are not comfortable with the response from your
agent, seek out a second opinion from a specialist in insuring the industry.
Finally, ask for a price at the limits you desire. The appropriate coverage is your
best sleeping pill.